The bond issue was led by BNP Paribas and marked the return of the investment bank to the China/Hong Kong CB market after several years of absence. BNP has been making a comeback in the CB market elsewhere in Asia over the past year, however, and earlier this week arranged a $300 million privately placed exchangeable bond into Indonesian power producer PT Truba Alam Manunggal Engineering.
Xinyu HengdeliÆs bond issue was completed on Tuesday evening, just two weeks after Pine Agritech, a Singapore-listed producer of soybean products, struggled to sell $263 million worth of CBs that were also denominated in renminbi. UBS, which was the bookrunner for that deal, eventually had to re-offer the bonds below par to ensure sufficient take-up.
Since then, China has raised its benchmark one-year lending rate by another 27 basis points to 6.84% and global credit markets have remained choppy amid ongoing concerns over the potential fall-out from the subprime mortgage crisis in the US.
Xinyu Hengdeli had no problem finding takers for its offering, however, and the CBs traded up in the aftermarket yesterday to about 100.625%. Sources say the deal attracted more than 40 investors and was over four times covered at the base size. The final size may increase to Rmb1.15 billion ($152 million) if the 15% greenshoe is exercised in full.
A likely explanation for the good reception - aside from positive views on the sector and the fact that the issue was only half the size of Pine AgritechÆs offering - was that the Xinyu Hengdeli deal was much more generously priced, CB specialists say. For starters, the conversion premium presented significantly less of a challenge than Pine AgritechÆs 51% premium, which was the highest ever used on a renminbi-denominated CB.
Xinyu HengdeliÆs bonds were offered with a fixed premium of 45.3% over TuesdayÆs closing price of HK$4.86 and they also have a reset after three years subject to an 80% floor. This means that if the share price stops performing, the conversion premium could be reduced to no more than 16.3% over the current price, which would obviously make it a lot more palatable for investors.
Such reassurance may have been necessary after a sharp run-up in the share price, including a 26.9% rally this month alone. It has gained 268% since its initial public offering in September 2005.
The bonds, which are non-convertible for the first six months, have a five-year maturity, but can be put back to the issuer after three years for a yield-to-put of 2.1%. They were marketed with a yield ranging from 2% to 2.5%. There is an issuer call after three years, subject to a 120% hurdle.
The underlying assumptions included a credit spread of 215 basis points, a stock borrow cost of 0.5% (based on a commitment by the majority shareholder to lend stock) and investor protection for dividend yields above 2%. This gave a quite high bond floor of 97.3% - again something which would have reduced the potential risks for investors û and an implied volatility of 19.7%.
The bulk of the demand was said to have come from hedge funds, although long-only investors also picked up the bonds as it is quite difficult to buy the shares in the market as the actual freefloat is pretty small. The company sold 28.8% of its share capital during the IPO, but a few long-term shareholders still control the majority of that. According to the source, Temasek holds 9.9%, while Swiss designer watch maker Swatch and the LVMH group, which includes the Luis Vuitton brand, each hold just over 7%.
Xinyu Hengdeli is the exclusive distributor of Swatch watches and 16 other international watch brands in China, as well as two brands on a non-exclusive basis. Last year it also acquired Elegant International in Hong Kong as part of a drive to expand outside the Mainland. Elegant has been engaged in the retailing of international branded watches in Hong Kong for 36 years, but since the takeover, Xinyu Hengdeli has managed to increase both turnover and gross profit at the new unit by more than 30% compared with the year-earlier levels.
Earlier on Tuesday, BNP also finalised the placement of three-year bonds exchangeable into IndonesiaÆs Truba Alam to 22 investors following a 24-hour marketing period. The bonds were offered on fixed terms, including an annual coupon of 2%, a yield to maturity of 9.5% and an initial exchange price of Rp1,620. Unusually, the exchange price represents a discount of 16.9% to MondayÆs closing price and a 22% discount to yesterdayÆs final price.
Together with Bumi ResourcesÆ $300 million CB in June, the deal ranks as the largest equity-linked offering out of Indonesia since the financial crisis.
Showing that it is serious about becoming a player in the Asian CB market, BNP is also one of the joint bookrunners û together with Citi and UBS - for a convertible of about $400 million for Singapore-listed Indonesian oil palm plantation company Golden Agri-Resources that is expected to be launched at the end of this week.
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